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'Safe buy' not quite so, as Ten raises capital again

Matthew Kidman

Sit and watch how Ten performs in the next six months. Photo: Simon Alekna

ONE of my worst calls this year was declaring Ten a safe buy after its capital raising at 51¢ a share. I believed the company had sufficiently recapitalised its balance sheet and, under a new chief executive, was ready to improve performance. The company had greater operational issues than I perceived and so here we are six months later with a 4 for 5 rights issue staring us in the face at 20¢ - 60 per cent lower than the previous issue.

What do existing shareholders do with the latest issue? Given the current issue is non-renounceable you either take up the 20¢ offer or get diluted. Luckily, for retail shareholders you have until January 18 to decide whether to put more money in. Given the stock will be trading and the institutions have already committed $180 million it should be an easy trading decision on whether to commit the money at 20¢. If the stock is trading above 20¢ a share in January, put the new funds in and look to exit for a profit. If the shares are trading below 20¢, walk away and get diluted.

For those people not shareholders, do you buy in now? To justify the current valuation of 25¢ a share it has to dramatically grow market share at a time when it has announced cost-cutting. Every 1 per cent gain in free-to-air commercial TV share is worth more than $20 million in earnings before interest, tax, depreciation and amortisation. But the programming line-up believers might have to wait until 2014 to see the earnings swell.

If the company can claw back 2 per cent of market share in two years, then at current prices it will trade at around seven times EBITDA - about a fair price for a TV asset. If it can gain more market share it becomes a bargain.

All this adds up to sitting and watching how Ten performs in the next six months before making a decision to invest.

Silver Chef (SIV)

THE board of the Queensland finance group should consider renaming the company Silver Bullet given how rapidly the share price has advanced in recent times. We wrote about Silver Chef in early October when the stock was $4.40 a share. Our thesis was the company had managed to secure a second source of debt funding through a $30 million public bond issue. This would allow it to grow its hospitality and equipment financing divisions at a higher rate with demand robust.

Since October the stock has catapulted 20 per cent to $5.25 a share and now trades on about 12 times forecast 2013 financial year earnings. Silver Chef's long-term multiple is closer to 10 times and so investors should seriously consider unwinding the trade.

The company, under the strong leadership of Charles Gregory, has a fantastic future but requires capital to continue to grow. This means there should be equity issues allowing investors to jump into the stock at a price closer to its long-term average valuation. Silver Chef has delivered an impressive return on equity of more than 20 per cent in recent years and will continue to grow earnings at around 15 per cent per annum.

RXP Services (RXP)

DOWN at the small end, one of the Fielding family has teamed with SMS Management founder Lloyds Roberts to form IT services outfit RXP. This time it is Ross Fielding running the show. The former Telstra operative follows in the footsteps of Glenn Fielding of DWS and Paul Fielding of the successful but briefly listed Ingena Group.

RXP was formed after Ross Fielding cobbled together companies in the IT services world and then listed on the Australian Securities Exchange this year. The company continues to make acquisitions and is raising $10 million of equity to fund this growth. The money is being raised at 50¢ a share (current price is 53¢ a share), giving the company a market capitalisation of just under $40 million.

RXP has forecast it will post earnings before interest and tax of between $4.5 million and $6 million for the 2013 financial year. If we pick the mid-point of this range, the company is trading on an EBIT multiple of about eight times.

This company will continue to grow by acquisition and has a management team and board with the credentials to run a significantly larger organisation. While the value is not compelling at this stage, I would expect the company to deliver strong earnings growth in the next two to three years, making it one to keep an eye on.